China Government’s Secret New Gold Investment

Chinese miners teased by Matt Badiali

By Travis Johnson, Stock Gumshoe, September 4, 2009

This article was originally published on the members-only Irregulars site on July 31, 2009, it is being reproduced here but has not been updated or significantly revised.

Now that Matt Badiali’s S&A Oil Report has renamed itself the S&A Resource Report, it shouldn’t be any surprise that he’s looking not just at the energy companies that have been a big part of his focus over the past several years, but at gold.

Lately, I’ve been seeing a lot of his ad that talks up a potential 500% gain from some Chinese gold miners …

Now there’s a promise, eh? Gold and China, probably the two most-teased investment themes of the past two years, and here we are combining them together. Not bad!

The promise this time is that Chinese state sponsorship is about to help investors in some specific miners reap incredible rewards.

Here’s how the ad launches:

“China Govt’s Secret New Gold investment could pay 500% over next 2 years …

“The specifics of this opportunity have NEVER been written about in The Wall Street Journal, The New York Times, or any other U.S. newspaper or magazine.

“Yet this could be the easiest way to make a fortune over the next few years. The last time the Chinese Gov’t created a similar investment (2002) it returned 1,084%.

“Princeton University investing legend Burton Malkiel says: ‘With the government in control, [this type of investment] will never fail.'”

That quote from Dr. Malkiel, by the way, is from his 2007 book, From Wall Street to the Great Wall. And it is, of course, not about the specific stock teased here — the full quote is “Those who favor SOEs [state-owned enterprises] point out that with the government in control, these companies will never fail.”

He goes on to present the counter-argument on that same page, by the way — noting that many investors think the smaller, entrepreneurial companies without state ownership are more potent growers … but more importantly, he goes on to say that diversification in all kinds of companies in key, and “most should consider only diversified portfolios of Chinese stocks rather than individual companies.”

But where’s the fun in that?

The ad goes on to tell us that China has gone gold-crazy, with the government adding to its gold reserves — and that, while it’s all very secretive, the theory essentially can be summed up thus: They’re trying to spur successful gold mining so they can buy it at home and not have to deal with the global markets. At least, that’s how I read the tease.

Here’s a bit more of the pitch:

“Behind the scenes, in a move that has gone almost completely unreported in the Western press, the Chinese government has created a gold investment that could dwarf the returns of gold bullion, ordinary gold stocks, or any other type of gold investment you’ve heard of before.

“I wouldn’t be surprised if you see gains of 1,000% or more.

“I realize that may sound impossible, but consider…

“This is not the first time Beijing leaders have secretly created such an opportunity:

“In the late 1990s, the Chinese government created two similar investments. One (to help the local insurance industry) went up more than 625% in just a few years… the other (to aid the energy sector) has gone up about 1,084% over a similar period.

“But this is the first time Chinese officials have intervened in this way in the gold markets—and I expect the result will be a windfall for savvy investors over the next few years.

“After all, gold is one of the only “buy and hold” investments in the world right now. It is also the only investment in the world that has gone up EVERY YEAR for the past five years straight. And, remember, China remains the fastest-growing economy on the planet, with the wealthiest government on Earth.”

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Now let’s be clear, if we’re working from these examples — China Life and CNOOC (they do disclose what they’re talking about with those two examples) — then we should also note that Chinese officials have created way, way, way more than two “similar investments.” The Chinese economy is still overwhelmingly dominated by state-owned enterprises, many of which are actually owned/controlled by regional and local governments, and I expect it’s still safe to say that more of them have remained corrupt enclaves of cronyism than